an economic analysis of an aesthetic assetwebsites.uwlax.edu/kincman/376 paperwork/april 3 how is...
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The Market for Art
An Economic Analysis of an Aesthetic Asset
The Bay of Marseille, Seen from L’Estaque, Paul Cezanne, c 1885
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Income = Consumption + Savings
•Consume today
•Save to consume more tomorrow
•Inflation
•Reward for putting off gratification
The Blue Room, Pablo Picasso, 1901
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Income = Consumption + Savings
•Types of savings
•Guaranteed return i.e. fixed interest
•Speculative return i.e. capital gain
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Consumption v Saving
•Saving for financial return
•Stocks
•Bonds
•Savings accounts
Two Anglers, Claude Monet, 1882
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Consumption v Saving
•Consumption for utility
•Food
•Entertainment
•Transportation
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Consumption v Saving
•Goods that serve both functions
•Real estate
•Collectibles
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Saving (Investments)
•Income generating
•Stocks
•Bonds
•Capital gain
Vibrant Landscape, Graham Gercken, 1960
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Saving (Investments)
•Not all investments have both
•Capital gain only
•Precious metals
•Collectibles
• Art
• Beanie babies
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What is art?
•Museum pieces
•Something I can pick up at Walmart
Mona Lisa, Leonardo da Vinci, 1503
Illustration, Daniel Craig, c 2000
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There is no fixed definition of art
•experts and scholars disagree on exactly what art is
•supply is somewhat arbitrary
•price determined primarily by demand for art
My Bed, Tracy Emin, 1998
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Why consume art?
•Investment
•Satisfaction (consumption value) Massacre of the Innocents, Peter Paul Rubens, 1611, highest recorded auction price for a painting on the European market, $76.7 million in 2002
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Who consumes (buys) art?
•The rich
•The rest of us
The Starry Night, Vincent van Gogh, 1889
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The tax advantages of capital gains
The Last Supper, Leonardo da Vinci, 1495-98
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Art as an investment
•Risk return tradeoff
•Minimizing risk through diversification
Woman on a Terrace, Henri Matisse, 1907
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Art as an investment
•Does art correlate positively or negatively with equities?
•Different studies come to different conclusions
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Art as an investment
Banana, Andy Warhol, 1966
•Why the lack of consensus?
• Thin market for illiquid goods
• Do we compare prices only for the same painting that is resold? If so, we have few observations • Or do we use hedonic
measures, by comparing the prices over time of paintings with similar traits?
•E.g. style (portraits),
•medium (watercolor),
• time period (18th century),
• artist (e.g. Picasso prints)
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Venus de Milo, Alexandros of Antioch, 101 BC
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What determines a painting’s value?
• Subject matter
• Style
• Size
• Condition
• Artist
• Artist age at time of painting
• Where and when the piece is sold
• Agnello and Pierce: controlling for these variables, art investment returns are favorable to stocks by being able to diversify across artists
La Ronde, Auguste Rodin, 1883-84
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•Long history
•Fixed supply of masterworks
•Wider market
•The very rich buy art so it is conspicuous consumption
Baudlaire’s Mistress Reclining, Edouard Manet, 1862
Why art has thrived but beanie babies busted
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Conspicuous consumption
• Thorstein Veblen 1899
• Consumption that is unrelated to value of a good
• Satisfaction from showing off what I consume
• Big house
• Fancy car
• Designer labels
• As the price of art goes up, so does satisfaction from owning it
Seated Man, Georges Seurat, 1883
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American Gothic, Grant Wood, 1930
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Sky Above Clouds IV, Georgia O’Keeffe, 1965
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Risk and return
•Higher variance generally means higher return
•Standard deviation is square root of the variance
•“standard” way of knowing what is normal and what is extraordinarily small or large (more than one standard deviation from the mean)
Broadway Boogie Woogie, Piet Mondrian, 1942
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Risk and Return: Paintings v Dow Jones
-40
-30
-20
-10
0
10
20
30
40
50
1860 1880 1900 1920 1940 1960 1980 2000 2020
art hi
art avg
art lo
dow hi
dow avg
dow lo
Moon and Clouds, Ansel Adams, 1959
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Art
•Investment
•Consumption good • Aesthetic pleasure
• Conspicuous consumption
• Research by Benjamin Mandel helps explain the low return (relative to Dow Jones) to art despite its riskiness
• The measured “risk premium” of art is low relative to other risky assets
The Creation of Adam, Michelangelo, 1508-12
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Investing in Art
•The Masterpiece Effect
•Art dealers advise that it is better to purchase one $100,000 work than ten $10,000 works • This should not hold
• Efficient mkt should bid away such a return The Ice is Good, Grandma Moses, 1961
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The Masterpiece Effect •Ashenfelter and Graddy study disputes
this
•Masterpieces (defined as top 10% by price) do not outperform the rest. In fact they underperform • Steady across prints, American, impressionist, old master
samples
• Why would they underperform? • Overbidding due to fame of artist leads to reversion to mean on resale
At the Moulin Rouge, Toulouse Lautrec, 1892-95
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Hunters in a Landscape, Anonymous, c 1575-95
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Ashenfelter and Graddy
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Ashenfelter and Graddy
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Conclusion • Art is both a consumption and investment
good
• Conspicuous consumption:↑ price ↓return
• The value of art is in the eye of the beholder
• i.e. demand determines the price
•No particular benefit to investing in a specific type of art
Frozen River at Sunset, Aert van der Neer, 1660